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HUMAN RESOURCE

ACCOUNTING & AUDITPresented By:Saurabh Patel

Jasmeet KaurNamrata Panwar

Vaibhav LalwaniBunty Kumar

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Agenda UNIT I-INTRODUCTIONHR as assets -Definition of Human Resource Accounting - Introduction to Human Resource

Accounting - Human Resource Accounting concepts, methods and applications HumanResources Accounting Vs other Accounting .

Unit II HUMAN RESOURCE COSTS Managing Human Resources Cost Investment inemployees Replacement Costs-Determination of Human Resource Value-Monetary andnon-monetary measurement methods-Return on Investment Approach.

UNIT III-HUMAN RESOURCE ACCOUNTING SYSTEM Developing Human Resource Accounting Systems Implementation of Human Resource

Accounting Integrated of Accounting with other Accounting Systems Recent Advancements and future directions in Human Resource Accounting.

UNIT IV-HUMAN RESOURCE AUDIT

Role of Human Resource audit in business environment HR Audit objectives Concepts Components Need Benefits - - Importance Methodology Instruments

HRD score card Effectiveness of as an instrument Issues in HR audit Focus HRDaudit.

UNIT V-HUMAN RESOURCE AUDIT REPORT

HRD audit report Concepts Purpose Role of HR managers and auditors ReportDesign Preparation of Report Use of Human Resource audit report for Business

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INTRODUCTON

The total growth of the organization dependsmainly on the skills of its employees and theservices they render. Hence, the success of any organization is contingent on the quality of theirHuman Resource- its knowledge, skills,motivation and understanding of the

organizational culture. Therefore, it is imperative that the humans be

recognized as an integral part of the total worth

of an organization.

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In order to estimate and project the worth of thehuman capital, it is necessary that some method

of quantifying the worth of the knowledge,motivation, skills, and contribution of thehuman element

Human resource accounting (HRA) denotes justthis process of quantification/measurement of the Human Resource.

Human Resource Accounting (HRA) is

basically an information system that tellsmanagement what changes are occurring overtime to the human resources of the business.

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LEARNING OBJECTIVES

Importance of understanding the HumanResources Accounting and Auditing

Define the concept of Human Resource as Asset

Methods and applications of Human Resource Accounting

Comparison of Human Resource Accounting and other Traditional Accounting

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HUMAN CAPITAL AS A FOUNDATIONAL ASSET

Human Capital valuation is required by analysts inorder to give those more tools to objectively assesscompany viability.

It is important to notice the critical factors that thehuman capital plays as the foundation of the financialcapital.

The human intellectual asset is, like many physical

assets, hard to value. Based on management, vision and monitoring,structural capital is critical and is one explanation of thehigh rewards given to CEOs.

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HR AS AN ASSET

Once organisations realise the actual benefit andtake it as a growth process, it will only help themin increasing their shareholders value. When acompany is able to assess an individuals worth,it helps in increasing its own worth.

Basically HRA can be tracked through twomethods - Cost-based Analysis and Value-based Analysis.

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HUMAN RESOURCE ACCOUNTING

Definition:- The American Accounting AssociationsCommittee on Human Resource Accounting (1973) has defined Human Resource

Accounting as The process of identifying andmeasuring data about human resources andcommunicating this information to interestedparties .

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According to Likert (1971), HRA serves the following

purposes in an organisation.It furnishes cost/value information

for making management decisions about acquiring,allocating, developing, and maintaining humanresources in order to attain cost-effectiveness; It allowsmanagement personnel to monitor effectively the useof human resources; It provides a sound and effectivebasis of human asset control, that is, whether the assetis appreciated, depleted or conserved; It helps in thedevelopment of management principles by classifying the financial consequences of various practices.

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According to Likert (1971), HRA serves the following purposes in an organisation:

It furnishes cost/value information for making management decisions about acquiring, allocating,developing, and maintaining human resources in orderto attain cost-effectiveness;

It allows management personnel to monitor effectively the use of human resources; It provides a sound and effective basis of human asset

control, that is, whether the asset is appreciated,depleted or conserved;

It helps in the development of management principlesby classifying the financial consequences of various

practices

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To provide qualitative information on humanresources.

To provide more relevant and timely information to theinterested parties.

To provide a sound and effective basis of asset control. To knows whether the human resources are properly

utilized and allocated. To allow management personnel to monitor effectively

the use of human resources. To evaluate the return on investment on human capital.

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SUMMARY

When the human resources were quantified, itgave the investors and other clients true insightsinto the organization and its future potential.

Proper valuation of human resources helpedorganizations to eliminate the negative effects of redundant labor.

Whatever the tool or approach to HRA, muchof the potential for developing human resourceaccounting capability and gaining its advantagedepends upon the availability of and accessibility

to the required data.

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Unit IIHUMAN RESOURCE

ACCOUNTING SYSTEM

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Introduction

Focus

Return OnInvestment

Return onKnowledge

Human capital also provides expertservices such as consulting, financial

planning and assurance services, whichare valuable, and very much in demand

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Learning Objectives

This Unit is intended to provide an intensiveknowledge on:

Developing Human Resource Accounting Systems

Implementation of Human Resource Accounting Integrated of Accounting with other Accounting

Systems

Recent Advancements and future directions in HumanResource Accounting.

l h

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Developing the Human Resource Accounting Valuation Models of

HRA: The existing Valuation models are Lev & Schwartz Model (1971):

Flamholtz Model (1971): Jaggi and Laus Models (1974) Morse Model (1973 )

The Ogans Models (1976) Chakraborty Model ( 1976)

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Integrated of Accounting with other Accounting Systems

Human Resource And Costing To measure human value as a part of goodwill, HRA was introduced into theaccounting literature in the 1960s(Flamholtz, 1985), although support forthe idea of accounting for human resource

values can be found much earlier

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Purposes

(1) An ambition to improve the management of humanresources from an organisational perspective by increasing the transparency of human resource costs,investments and outcomes in the management

accounting rituals, such as profit and loss accounts,balance sheets and investment calculations;(2) Attempts to improve the bases for investors company-

valuation.

(3)Aspirations from human resource specialists, company doctors or unions to use monetary arguments whensuggesting investments in human resources.

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Implications for Measuring HumanCapital Advantage

The findings laying out the human capital value chain are these:1. In addition to being fairly compensated, people place high value

on:Being in an environment where they can grow and learn and

advance* The managerial skills/abilities of their immediate supervisor* Being treated fairly, appreciated and acknowledged

* Doing work that makes a contribution2. These determinants of employee satisfaction drive employee

retention3. The retention rate among key employees drives customer

satisfaction4. Customer satisfaction drives customer retention5. Customer retention drives profitability and other measures of

financial performance including total stockholder return.

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Three categories of learning intervention

measures should be captured:1. Inputs measures of the intensity of learning resourcesavailable to employees, including formal and informallearning opportunities.

2. Outcomes intermediate measures of the effectivenessof learning 3. Organizational Learning Capacity an overall

assessment of an organizations commitment to and

capacity for learning

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Summary

The implementation of non-financial performancemeasures and control systems in high-technology manufacturing plants. To compete successfully measurements of the following intangible key success

factors were developed: customer satisfaction,manufacturing excellence, market leadership, quality,reliability, responsiveness, and technological leadership

The new non-financial measurement system was foundto affect the success of the strategy of the firm. Inaddition, the measures were actionable at the plantlevel, which provided the possibility for almost instantcorrections.

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UNIT III

HUMANRESOURCE COSTS

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LEARNING OBJECTIVES

This Unit is intended to provide an intensiveknowledge on:

Investment in employees to consider Human Resource

as Asset Approaches to Measure HRA Methods and approaches to measure the non-monetary

value Measuring the group value Return on Investment Approach

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INVESTMENT IN EMPLOYEES

To establish an effective standard for managing and assessing human resource development isrequired.

To improve the functional level of anorganization over the long term, it is necessary to envision the employee career path based onthe thrust of the companys management, and tocreate a training and development system thatcombines OJT (on-the-job training) with Off JT(off-the-job training).

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MEASUREMENT IN HRA

The two main approaches usuallyemployed for the measurement are:

1. The Cost Approach 2. The Economic Value Approach

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THE COST APPROACH

Historical Cost

Sacrifice that wasmade to acquireand develop theresource

Eg. costs of recruiting,selection, hiring,

placement,orientation, andon the jobtraining

Opportunity cost

cost that wouldhave to beincurred if

presentemployees are tobe replaced

several costs of recruiting,selection, hiring,

placement,orientation, andon the jobtraining

Standard CostMethod

standard costsassociated withthe recruitment,hiring, trainingand developing

per grade of employees aredeterminedannually.

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basic theme is to compute thepresent value of the future direct andindirect payments to their employeesas a measure of their human resource

value.

The Lev andSchwartz

Model

an internal market for labour isdeveloped and the value of theemployees is determined by themanagers.

Managers bid against each other forhuman resources already available

within the organisation.

Hekimianand Jones

CompetitiveBidding

Model

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NON MONETARY METHODSFOR DETERMINING VALUE

Measure the human resource but not in money terms.

Rely on various indices or ratings and rankings. Refer to a simple inventory of skills and

capabilities of people within an organisation orto the application of some behavioral

measurement technique to assess the benefitsgained from the human resource of anorganisation.

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Listing of the education, knowledge, experienceand skills of the firms human resources

The skills orcapabilityinventory

Ratings: scores assigned to characteristicspossessed by an individual

Ranking: Ordinal form of rating in whichsuperiors rank subordinated in various dimensions

PerformanceEvaluationMeasures

Determines a persons capacity for training anddevelopment

Uses a Trait Approach in which traits essential for aposition are identified

Assessment of potential

Used to assess employee attitude towards their job,pay, working conditions etc to determine their jobsatisfaction or dissatisfaction

AttitudeMeasurements

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Likert and Bowers Model

Can be controlled by the organisation Managerial behaviour, organisational structure

Casual Variables

Reflect organizational capabilities and involve groupprocesses, peer leadership, organization climate, andthe subordinates satisfaction

Intervening Variables

Reflect the achievements of the organization or thetotal productive efficiency in terms of sales, costs,earnings, market performance, etc.

Dependent on casual and intervening variables

End Result

Variables

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Brummet, Flamholtz and PylesEconomic Model

Follows the principle that aresources value is equal to the

present worth of the future services it can be expected toprovide,

and therefore it can provide abasis of measuring the value of a group of people

Groups of human resourcesshould be valued by estimating their contribution to the totaleconomic value of the firm

The firms forecasted futureearnings are discounted to

determine the firms present value, and a portion of theseearnings is allocated to human

resources according to theircontribution

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Hermansons UnpurchasedGoodwill Model

The best available evidence of thepresent existence of un-ownedresources is the fact that a given

firm earned a higher than normalrate of income for the mostrecent year

Supernormal earning are anindication of resources not

shown on the balance sheet, suchas human assets

Limitations: value of human assets will be an

underestimation The method only uses the actual earnings

of the most recent year as the basis forcalculating human assets, ignoring theforecasts of future earnings that areequally relevant for decision making

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Human organizationaldimensions method

Based on the relationshipamong causal, intervening and

end-result variables.

The causal variables influencethe intervening variables, which,

in turn, determine theorganizations end result

variables

Changes in the key dimensionsof organisation can be used asdependable indicators for

forecasting future changes inproductivity and financial

performance

Changes in the productivecapability of a firms human

organization cannot be assessedcorrectly unless periodic

measurements of causal andintervening dimensions of thatorganization are taken regularly

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Methods for valuation of expensecentre groups

Capitalization of Compensation Capitalizing a persons salary and using

it as a surrogate measure of human value

The value of the group is essentially the aggregate value of the individualscompromising the group

Replacement Cost Valuation The replacement cost of a group is

defined as the sacrifice that would haveto be incurred today to recruit, select,hire, train and develop a substitute

group capable of providing a set of services equivalent to that of a grouppresently employed

Original Cost Valuation Involves estimation of the original cost

of recruiting, selecting, hiring, training,and developing a firms existing humanorganization

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SUMMARY

Human Resource factor is very crucial,important and sensitive factor of production.Even though human resources are the mostimportant element of the business process, their

value is not shown among the assets in atraditional statement of financial position.

Human resources are truly the most valuableresources a firm can possess.

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Unit IV HUMAN

RESOURCE AUDIT

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Learning Objectives This Unit is intended to provide an intensive knowledge on: Role of HR Audit in Business Environment Objectives of HR Audit Concepts of HR Audit

Components of HR Audit Need of HR Audit Benefits of HR Audit Methodology and Instruments of HR Audit HRD score card Effectiveness of as an instrument Issues in HR audit Focus of HRD audit

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HR AUDIT Typically the basic reason why organisations prefer to conduct

an HR audit is to get a clear judgment about the overall status of the organisation and also to find out whether certain systems putin place are yielding any results. HR audit also helps companiesto figure out any gaps or lapses and the reason for the same.

An HR audit can be used by an organisation for multiplepurposes. Some of the more common reasons are:

To identify and address HR-related problems. To seek out HR-related opportunities. To conduct due diligence for mergers and acquisitions. To support initial public offerings.

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THE AUDIT PROCESS

The HR audit process is conducted in different phases.Each phase is designed to build upon the preceding phase so that the organisation will have a very strong overview of the health of the HR function, at theconclusion of the audit. These phases include:

Pre-Audit Information Pre-Audit Self-Assessment

On-site Review Records Review Audit Report

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Preparation for an audit

Auditor engagement :If using internal resource it isbetter to appoint them formally with clarity on scopeand select persons who are non political or those whoare not high on hierarchy. Also, if internal persons areauditing there must be training in auditing.

Data gathering :Completion of a self-assessmentquestionnaire significantly expedites the audit processand allows for better audit planning.

On-site access : The on-site portion of the audit is themost critical.

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Approaches to HR Audit There are five approaches for the purpose of evaluation of HR

in any organization: Comparative approach Outside authority

Statistical Compliance approach and Management By Objectives(MBO) The audit is made up of four main steps: 1) Define desired HR practices for your organization 2) Assess current practices against the criterion that you have

established 3) Analyze the results 4) Establish improvement goals and take action

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PURPOSE OF AN AUDIT The audit can serve any of the following purposes: __ To clarify desired practices of HR work and roles within the

organization (HR Department, Line Managers). __To establish a baseline for future improvement.

__To evaluate current effectiveness. __To standardize practices across multiple sites within a division

or company. __To assess current knowledge and skills required of HR

practitioners. __To improve performance levels to key customers within theorganization.

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Benefits of HR Audit

It provides the various benefits to the organization. These are: It helps to find out the proper contribution of the HR

department towards the organization. Development of the professional image of the HR department

of the organization. Reduce the HR cost. Motivation of the HR personnel. Find out the problems and solve them smoothly. Provides timely legal requirement. Sound Performance Appraisal Systems. Systematic job analysis. Smooth adoption of the changing mindset.

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Methodology and Instruments of HR Audit

In audit to evaluate the HRD structure,system, culture, competency & other aspects,the following multiple methods are used:

Interviews Group Discussions and workshops Observation Analysis of records and documents Questionnaires

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HRD score card After questioning contemporary management accounting in

several articles during the 1980s, Kaplan & Norton (1992)introduced the BSC concept. The scorecard should incorporate the complex set of cause-and-

effect relationships among outcome measures and theperformance drivers that describe the trajectory of the strategy of those outcomes. The measurement system should make therelationships (hypotheses) among objectives (and measures) inthe various perspectives explicit so that they can be managed and

validated. Intellectual capital = Human Capital + Organisational

Capital + Customer Capital Human capital concerns the knowledge that individuals possess

and generate upon demand; organisational capital is thatknowledge that has been captured/institutionalised within the

structure, processes, and culture of an organisation;

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BSC Used

The aim of this section is to see how BSC isactually utilized. Olve et al. (1998) hold that only a few companies have advanced beyond

applying it on a limited basis. Because reporting on the BSC is not easily distinguished from other forms of externalreporting on intangibles, the section will start

with an analysis of the extant literature onreporting of intangibles.

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Summary

The auditors always prepare and submit an audit report toauthority of the organization, which may be clean orqualified. The clean report indicates the appreciative of thedepartment's function, but the latter one represents the

gaps in performance and therefore contains remarks andremedial measures. HR Audit is very much helpful to facethe challenges and to increase the potentiality of the HR personnel in the organization.

The HR Audit can be a powerful lever of change in yourdepartment and organization. In one sense it is simple, inthat each step can be completed fairly quickly and withease. Also, the degree of detail and definition of performance is within the control of the audit developer.

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Introduction

The audit programme comes to an end with thepreparation of the audit report. The report may beclean or qualified. The report is qualified when the HR performance contains gaps. Where gaps are observed,remedial measures are suggested. The report is clean

where the performance is fairly satisfactory. Estimating your future workforce requirements is an inexactscience. But a number of different techniques exist tohelp you do this, as well as to calculate the state of thelabour market in the short to medium-term and assessany problems or implications that result.

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C d P f HRD

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Concepts and Purposes of HRD Audit report

How to develop and introduce an effective HR planning system. How to estimate workforce requirements (the audit sets out 11 different

techniques pick the one(s) that look best for your type of business. (As acheck, you can also use these techniques to calculate how many staff youneed now.)

Understanding and predicting the available labour supply. How to analyse the supply and demand balance and deal with a surplus

or a shortfall. Handling the implications for: recruitment, internal redeployment, pay &

rewards, training & development, and employee retention. Monitoring your plans how to develop a system that will give you reliable

early-warning of problems ahead.

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Process of human resource audit

The audit covers four audit is conducted withthe help of data provided by HR research. Theaudit report provides feed-back to the HR department.

REENGINEER YOUR HR AND

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REENGINEER YOUR HR ANDMAKE IT MORE STRATEGIC

Through HRD Audit HR is alive and well, central to the success of

companies.

HR management is on the agenda and evolving slowly and steadily.

HR departments are aging and ailing.

C t i d f

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Competency required for aneffective HRD Auditor

Planning skill Information seeking skill Ability to diagnose Ability to probe Ability to paraphrase Organizing skill Interviewing skill Facilitation skill Observation skill Data recording skill Documentation & report writing skill Communication skill Presentation skill

Proactive Patience Initiative Taking Time Management

H R D l t

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Human Resource DevelopmentSystems and Procedures

Scope: Audit whether there is the integrated use of training and development, organisationdevelopment, and career development to improve

individual, group, and organisational effectiveness. These three areas use development as their primary process.

Training and Development: Organisatlon Development Career Development

R l f H R

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Role of Human ResourceManagement (HRM) System

Scope: Audit whether the HRD systems and procedures are aligned with the HRM systems and procedures to promote staff competence,confidence, and performance standards. These areas are closely relatedto the three primary HRD areas. In them, development is important, butit is not the primary orientation or process. Organistion /Job Design: defining how tasks, authority, and systems will be

organised and integrated across organisational units and in individual jobs. Human Resource Planning: determining the organisation's major human

resource needs, strategies and philosophies. Performance Management Systems: assuring individual and organisation goals

are linked and that what individuals do every day supports the organisational goals. Selection and Staffing: matching people and their career needs and capabilities

with jobs and career paths.

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HR INFO SYSTEMS

Scope: Audit whether these areas support the achievement of results in the area of HRD and HRM; audit whether HR maintains performance indicators that help management keeptrack of HR costs and benefits. Compensation And Benefits: assuring compensation and benefits

fairness and consistency. Employee Assistance: providing personal problem solving and

counseling to individual employees. Union/Labor Relations: assuring healthy union I organisation

relationships. HR Research And information Systems: assuring an HR information

base is in place that provides timeous management information; assuring HR functional performance indicators are in place.

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Audit Reports in all the four organizations studied served as amirror and pointed out the strengths and areas of

improvement. Since this also included top management as well, none of the reports were opened up to all the employees.Out of the four organizations studied, in three organizations,these are confidential reports made available to topmanagement and HR chief.

Implementation of the HRD Audit inputs were doneselectively and mostly by the HRD department without muchinvolvement of line managers. However, in one organization,line managers implemented the audit inputs.

Visible changes of HRD Audits were observed in all spheresof activities with specific changes seen in HRD systems,people competency development and culture developmentactivities.

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Summary

HRD audit report is not intended to be originally anOD tool. By virtue of its diagnostic and participativemethodology it seems to work as a change managementtool. The interview methodology, itscomprehensiveness, the audit methodology insisting onstarting and ending with top management involvementall have high potential for initiating change processes. Itcould be further refined as an OD tool. It involves all

the HRD staff and a large number of Managers in theaudit process and makes them conscious of the areasneeding improvements.

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Thank You!